No, The Economy Wasn't Built On Consumer Debt

"During an argument, have you ever found yourself unable to speak because you're so overwhelmed by how utterly wrong the other person is and you can't comprehend that they actually believe what they are saying."

At that time, I found it funny. Yesterday, however, reality became stranger than fiction as Steve Leisman stated the following during a CNBC interview (via Zero Hedge):

"Debt is always pointed out as a negative thing, when in fact debt is the great bridge between working hard and playing hard in this country.This country has been built on consumer debt."

This is the part where I found myself speechless.

Let's break his statement down into 3 parts for the purpose of this analysis:

This country was built on consumer debt.

Debt is the bridge between working hard and playing hard.

Debt is always pointed out as a negative thing.

(Note: The points are intentionally in reverse order so that they will correspond with the historical data)

"This Country Was Built On Consumer Debt"

This is just clearly wrong as even a cursory study and understanding of American history will tell you otherwise. This country was built on the strong backs and skilled hands of American ingenuity, innovation and determination. Yes, there are indeed many dark periods in our history where human misery, suffering and bondage were an acceptable consequence of economic expansion, but nonetheless it was labor that built America. Not consumer debt.

The first chart below is a history of economic growth in the U.S. as compared to total debt from 1870 to present on an annual basis. I have included a polynomial trend line which shows that as debt began to surge in the 1980's economic growth began to wane.

What is clear is that sharp increases in debt have negative consequences for economic growth. If we take a look at post-WWII data, we can more clearly see the impact of consumer leveraging on the economy.

What Leisman misses, is that it wasn't credit that built this country but rather high levels of personal savings that ultimately led to productive investments. Post WWII, the U.S. was the epicenter of production and manufacturing for the majority of the world as war torn Europe and Japan were rebuilt. However, post 1980, the collision of a structural shift in manufacturing, the rise in financial engineering and the age of "consumerism" changed that dynamic. As can be more clearly seen in the chart above, the surge in consumer debt was used to bridge the gap between declining wage growth and an arguably unrealistic high standard of living.

Debt Is the Bridge Between Working Hard And Playing Hard

The rise of consumerism was greatly fostered by the rise of financial engineering and falling interest rates. More and more products were created to provide for low cost lending, no money down and longer financing structures. The motto of "no cash, no problem" was quickly swept up by a largely financially illiterate population to the chagrin and rising profitability of Wall Street and the banking industry. However, there are inevitably consequences and limits to such actions.

"It was the 'borrowing and spending like mad' that provided a false sense of economic prosperity. The problem with this assumption is clearly shown in the chart below."

"In the 1980's and 90's consumption, as a percentage of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards.

In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt. Since 2000, consumption as a percent of the economy has risen by 1% over the last 13 years. In order to support that increase in consumption, it required an increase in personal debt of $6.1 Trillion. The importance of that statement should not be dismissed. It has required more debt to increase consumption by 1% of the economy since 2000 than it did to increase it by 6% from 1980-2000.

The problem is quite clear. With interest rates already at historic lows, consumers already heavily leveraged and economic growth running at sub-par rates - there is not likely a capability to increase consumption as a percent of the economy to levels that would replicate the economic growth rates of the past."

Debt Is Always Pointed Out As Negative Thing

Debt is a negative thing for the borrower. It has been known to be such a thing even in biblical times as quoted in Proverbs 22:7:

"The borrower is the slave to the lender."

Debt acts as a "cancer" on an individual's wealth as it syphons potential savings from income to service the debt. Rising levels of debt means rising levels of debt service that reduces actual disposable personal incomes that could be saved or reinvested back into the economy.

The mirage of consumer wealth has been a function of surging debt levels. "Wealth" is not borrowed but "saved" and as shown in the chart below, this is a lesson that too few individuals have learned.

"Keynes’s dogma, as stated in his magnum opus, The General Theory of Employment, Interest and Money, attempts to refute Say’s Law, also known as the Law of Markets. J.B. Say explained that money is a conduit or agent for facilitating the exchange of goods and services of real value. Thus, the farmer does not necessarily buy his car with dollars but with corn, wheat, soybeans, hogs, and beef. Likewise, the baker buys shoes with his bread. Notice that the farmer and the baker could purchase a car and shoes respectively only after producing something that others valued. The value placed on the farmer’s agricultural products and the baker’s bread is determined by the market. If the farmer’s crops failed or the baker’s bread failed to rise, they would not be able to consume because they had nothing that others valued with which to obtain money first.

But Keynes tried to prove that production followed demand and not the other way around. He famously stated that governments should pay people to dig holes and then fill them back up in order to put money into the hands of the unemployed, who then would spend it and stimulate production. But notice that the hole diggers did not produce a good or service that was demanded by the market. Keynesian aggregate demand theory is nothing more than a justification for counterfeiting. It is a theory of capital consumption and ignores the irrefutable fact that production is required prior to consumption."

Of course, Steve's comments really are of little surprise. With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to diverted from productive investment into debt service. Furthermore, with the Federal Reserve and the Administration actively engaged in creating an artificial housing recovery, and wealth effect from increasing asset prices, it is likely that another bubble is being created. This has never ended well. The concern is that without a reversion of debt to more sustainable levels the attainment of stronger, and more importantly, self-sustaining economic growth could be far more elusive than currently imagined.

Reminds me of when I was looking for work around the country. All I saw were these finance jobs but ones that didn't provide value to anyone. It was kind of an "aha" moment knowing then the economic system is screwed up.

A friend of mine called me this morning. He wants to take his family fishing tomorrow up in the mountains and camp out for the night. He wants me to go. You know what? It's infinitely better than pushing paper, and I won't be taking out any consumer debt to do it. I just need to get a chingadera of worms, throw some food together, grab my tent and some bedding, grab some beer, water my corn in the morning and go.

Go fishing LoP. Give yourself a temporary reprieve from watching the rat race readying itself for implosion. Take a day to enjoy yourself. Then get back to plotting to fertilize your fields with a guillotine. My enjoyment will not be financialized.

Could we get an Austrian-school economist in here, please. This debate would be over in 30 seconds.

QUALITY matters. Borrowing to buy plastic junk is BAD. Borrowing for a PRODUCTIVE reason (some might even call it an investment in the future) is good. Guess which of those two we've been doing a lot of lately? Doesn't matter since the Keynesian Psychos only care about the aggregate number, regardless of purpose.

The bubbles were built on consumer debt and the economy is now a series of bubbles so indirectly he is correct! But, the economy is built on lies and deception including the labor report today and that is what he needs to be discusiing!

Debt has created billionaires at the expense of the average joe. everytime the investor community was about to loose money from a normal resession the government bailed them out by issuing government debt at the federal and state level. this debt was never paid back and went straight to the investor class.

During a time with a strong currency and low interest rates - some debt is alright. During a time with weak currency and an ever imploding job market, and a fake economy - debt is a time bomb where the debtor is either in a race to delever before the SHTF or simply planning to default.

Delevering takes money (fiat) out of the economy going forward-

Defaulting takes credit out of the economy going forward-

People cheering on assumption of more debt in a time like now are irresponsible. We have to get our economic foundation back before debt can be taken on. To get our foundation back at this point, we are going to have to go through a maelstrom.

the financialization of everything is a BUBBLE and like all bubbles it will burst. The best thing that this CB centralized takeover can do is to shut down the Casino economy, reinstate Gl-ST separation and IMPOSE a debt jubilee on the financial world.

Borrowing money to create something that will result in growth - i.e. a business that borrows to build a new factory is not necessarily a bad thing. This is where the banks are actually vital.

However, there should be a distinction between business borrowing for productive means vs. main st borrowing for useless crap. There is no reason anyone should ever have credit card debt. There is no reason anyone should borrow to buy an overpriced luxury SUV or a McMansion with zero down.

In other words, some debt can grow the economy and other debt is extremely destructive to the economy.

Not mentioned in the article is Margin debt. All those fucking financial weapons of mass destruction are akin to bad debt. All those frigging leveraged CDS and derivatives... those were all based on collateral of collateral of collateral, which is nothing more than borrowed money.

My attitude toward the purchase of anything "new" (with the exception of PMs) has undergone a seachange since 2008. I refuse to play the bankster game on their own playing field and will never get back on the consumer debt hampster wheel. I make plenty of fiat paper every year but don't need all the shiny toys to make my pecker feel bigger. Give me liquidity, hard assets and a nose for buying good stuff on the cheap from overlevered/overextended sheeple when SHTF.

You really have to wonder if these guys even spend a moment to think about what it is they are saying. I truly belive they just repeat what they hear others say; even the ones at the "highest levels". They are truly parrots. Nothing (or not much) more.

From America’s early beginnings two forces have struggled to control her direction: one) the rights to property, production and growth through innovation, invention and contract and, two) the promoters of debt who would use government to grow their industry and a commission on the labor and production of others.

The result: the people become slaves to debt, their growth is regulated and the debt-controllers become incredibly wealthy and powerful.

It’s one thing for a factory owner to obtain a bank loan to expand his factory and production; it’s quite another thing for the banker to demand control of the factory before agreeing to the loan.

At this point, the American Dream is moving under control of the internationalists – financiers and non-U.S. bankers such as Stanley Fischer. When America established the Fed, she sealed her fate by relinquishing her sovereignty and her future to treacherous universalists who have no loyalty to America, her families, her convictions, or her borders.

If a free enterprise culture produces innovation, then that culture should be a part of the resulting prosperity. But it isn’t.

Richard Benson of Specialty Finance Group asks the pre-inflation $64 question: "If mankind's machines produce more with less labor each year, why shouldn't the dollar I make this year buy more next year? Shouldn't this increase in productivity flow through to the wage earner and saver?”

Why isn’t it?

We are being robbed.

Adds Benson: “Man is such a lucky creature because machines do all of our work. Our economy and prosperity stand on the shoulders of the geniuses who invented the wheel, lever and plow, and the creative thinkers who dreamed up mathematics, the internal combustion engine, silicone chip and the internet. These innovations have led to wondrous and unforeseen leaps forward for mankind. Human ingenuity, mixed with a desire to do better and produce more with less, has relentlessly driven productivity forward…”

Bankers didn’t do that; that didn’t build that. Free enterprise exercised by free men did that in America, once the patent giant of the world. (In 1997, a study of the inventors honored in the National Inventors Hall of Fame in Akron, Ohio, revealed that 91% of the world’s greatest inventors worked in America and only 9% in other countries.)

Americans’ standard of living should be soaring and reaching the far corners of the globe. The public’s bonus should be its share of its contribution to the productivity of the Great American Dream economy: those benefits should be open to all American citizens, yet they’ve become the sole property of the bankers and the corporations for their sole profits.

Communism did not die with the U.S.S.R. Communism is a program. It is deliberately identified as a Soviet-inspired system, when it isn’t. Now, all the fears of patriot Americans in the 40s have come true. All the attacks on capitalism and free enterprise and freedom fit their program.

It was the growth of collectivism and coercive central planning and the reversal of the fundamental principles of American life and culture under the banner of the Federal Reserve that transferred America’s wealth to these International bankers and set her down the Road to Serfdom, i.e., to world socialism.

A relatively small group of people, such as Goldman Sachs investment bankers, will continue to take the nation's wealth and redistribute it to themselves until our free society and its worldwide cornucopia of wealth disappears from the face of the earth. Without personal liberty, there is no economic liberty, and no need for investors.

"When the capitalist is gone," asks Ruth Wilder Lane, "who will manage production? The State. And what is the State? The State will be the mass of toiling workers."

Masses of toiling workers do not invest.

Money is the blood of civilized society, the means of all commercial trade except simple barter. America has relinquished the source of her lifeblood to those who will “deprive the people of their property…until their children will wake up homeless on the continent their fathers conquered.”

If Richard Nixon, RR, Bush Senior, Clinton, GWB and Cheney are "marxist" tyrants what does it make Putin and Hollande?

Apologists for a Camelotian Pioneerist America that never existed except in Jonh Ford's westerns; and even he knew he was just painting the legend not unraveling the truth.

When you spend your time denying the historical construct of America from Jefferson to FDR, and foulmouth the state as "marxist" antichrist; you get what you deserve : a return to Rome or to Inquisitorial warmongering NSA NSA Spanish Main type inquisition.

Kind of funny saying debt is good. When in fact it ends up being a one time boost and as debt payments get higher there is less money to spend monthly. We've all seen the families where both parents work have a nice house, cars and boats or whatever. It would shock most how broke they really are when all their earnings goes to bill payments.

“[T]he end stage will come when it will be out of control and they [the Fed] admit that prices are going up. They are going up, but not enough to the point where that’s a number-one concern of the people. But, you know, we see housing prices going up rapidly and medical care costs and all these things, a tremendous amount of inflation. But that’s the deep concern. And the world, they’re still buying dollars. They’re still taking our dollars and selling us stuff. So the Fed will continue to do what’s happening. So there will be a market phenomenon when the attitudes change and people lose confidence. But every single day, of course, we get closer to this particular date. But it will come, and nobody knows when it will come…

… All central bankers do the same thing. They facilitate big government. They print money and take care of the banks and finance wars and welfare. So there’s no way that’s going to change until the currency is destroyed…

… they’re at the point now where the biggest personal debt right now is student debt. It’s approximately a trillion dollars. And they’re not getting very many good jobs. Maybe jobs have perked up a little bit now but that’s not going to last. And so many are unemployed or underemployed. How many college graduates are working at McDonald’s? They say there’s a bunch of them…” – Ron Paul, May 28, 2013

The only difference between debt and currency is that debt is a delayed payment. They both mediate an exchange. To determine if debt is good or bad, just like currency, we need to answer the question; The debt, or currency, mediates an exchange of what?

"Good debt is represented by money, the money represents the product of work, the work is necessary to meet the demands of living. Bad debt is represented by counterfeit, the counterfeit represents the absence of product, the absence of product represents the impersonation of work, the impersonation of work represents the necessity to steal to meet the demands of living." -OC Sure; Debts and Wages

It's 'The Grays" again, people can't the difference between virtual values and real world values..so let's make it up as we go. I think our pocket books are tired of that. It's a big problem with virtual and real world value confusion, why I come here to this site the focus is on the real world.

Well I just keep the Killer Algorithm page vides with folks smarter than me out there that also address the real world. I just wrote out the new HHS Secretary approved and pondered if will get a break from the Sebelius Syndrome that has spread massively through Congress, the White House and more. We have Mary Jo White in the afflicted group too:)

For what it's worth: I expand definitions of both socialism & privatization to understand the Federal Budget.

Congress gets both health care & pension benefits, just like the US Military. Both Socialism and both expand federal budget. Emergency workers in police, fire, EMS crews are socialism just usually paid by local government. If we have hundreds of thousands of new federal contracts each year this is a real boon for contractors even if just paper, office supplies. But who is watching the watchers and keeping an eye on where federal tax dollars go???

Now we see congress asking to increase the gasoline tax/Diesel Tax (Excise) saying there isn't enough money for infrastructure (Socialism).

Basically we spend $45 Billion on Highway admin each year and last year it was about $50 Billion. Where does it go?

I say we DON'T AUDIT, Investigate, or Inspect Federal Spending Enough. Despite having IGs & GAO. Of course we all use Highways & bridges & water, so compared to the $700 Billion just in DoD in 2011... $50 Billion is either cheap or DoD is very expensive and over budgeted at $600 Billion this year. Black budgets for Intelligence must be North of $100 Billion, but who knows. Maybe we should match Highway & infrastructure spending to Intelligence, but audit them both.

18.3 cents per gal gasoline, 24.4 cents per gal diesel fuel, but last Gas Tax Bill was only 1997 (Can't get 20 years without new rip off bill). Do you hear congress complain about their pensions or the price of gas?? No.

"Debt is always pointed out as a negative thing, when in fact debt is the great bridge between working hard and playing hard in this country.This country has been built on consumer debt."

I had comparable thoughts when I read that for the first time: "this is so much convoluted bullshit in one statement, it can only have been made with the intention to let the rational thinker form a brain knot."

How does one bridge something that usually is perceived to need balance?(Is "playing hard" even meant as leisure, or as using deception and similar where hard work won't get you?)